REVENUE REGULATIONS NO. 12-2005 issued on June 23, 2005 defines “gross income” to implement the tax incentive provision of Republic Act (RA) No. 7922, otherwise known as “Cagayan Special Economic Zone Act of 1995” and of RA No. 7903, otherwise known as “Zamboanga City Special Economic Zone Act of 1995”. “Gross income” shall refer to gross sales or gross revenues derived from business activity within the Zone, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is made for administrative, marketing, selling and/or operating expenses or incidental losses during a given taxable period. For purposes of computing the total five percent (5%) tax rate imposed, the following deductions shall be allowed for calculating gross income for the following specific types of enterprises: ! Trading Enterprises: – Cost of Sales (Cost of Sales which is equal to inventory, beginning plus purchases minus Inventory of goods, ending) ! Manufacturing Enterprises: – Direct salaries, wages or labor expenses – Production supervision salaries – Raw materials used in the manufacture of products – Decrease in Goods in Process Account (Intermediate goods) – Decrease in Finished Goods Account – Supplies and fuels used in production – Depreciation of machinery and equipment used in production, and of that portion of the building owned or constructed by the registered enterprise that is used exclusively in the production of goods – Rent and utility charges associated with building, equipment and warehouses used in production – Financing charges associated with fixed assets used in production the amount of which were not previously capitalized ! Service Enterprises: – Direct salaries, wages or labor expense – Service supervision salaries – Direct materials, supplies used – Depreciation of machineries and equipment used in the rendition of registered services, and of that portion of the building owned or constructed that is used exclusively in the rendition of the registered service – Rent and utility charges for buildings and capital equipment used in the rendition of registered services – Financing charges associated with fixed assets used in the registered service business the amount of which were not previously capitalized. The effectivity of Sections 3, 4, and 6 of Revenue Regulations No. 2-2005 is hereby suspended insofar as it applies to enterprises registered under RA No. 7922 and RA No. 7903, pending the issuance of a new regulations pertaining on the matter related thereto.